SEC porn scandal takes heat off Congress

Regulatory agencies were gutted with the blessing of some of the same lawmakers who are pointing fingers now.

As I write, our nation is still buzzing about the news flash that finally delivered the truth about why our economy melted down without word one from our crack government regulators.

You know what I'm talking about. Yes, it's the great SEC porn scandal.

Last week, a new memo surfaced from the Securities and Exchange Commission's inspector general stating it had investigated dozens of agency staffers, including supervisors, for surfing the Web for dirty pictures with their government computers and during work hours. The investigations dated back at least to 2008 and targeted some employees with truly heroic habits — one accountant allegedly made 16,000 attempts in a month to access blocked websites from his SEC computer.

Priceless story. "Adults" in Congress and the news business wasted no time connecting the dots. You see, 2008 was when the financial meltdown started. So while the economy burned, these guys fiddled.

Guardians of public morality, tee it up:

Rep. Darrell Issa (R-Vista): "High-ranking officials within the SEC were spending more time looking at porn than taking action to help stave off the events that put our nation's economy on the brink of collapse."

Sen. Chuck Grassley (R-Iowa) (who requested the blockbuster memo): "If people want to do unethical and, in my opinion immoral, things...They ought to do it on their time, and not the taxpayer's time."

It's true that the SEC was a useless lump during the financial crisis, and for years earlier. The Bernie Madoff fraud, mortgage abuses, ridiculous accounting maneuvers by regulated banks and other public companies, all chugged along without timely or effective action by the nation's securities regulator. So it's proper to pin blame where it belongs.

But the guilty parties aren't on the SEC staff. They're in Congress.

The roots of the problem can be found in the consistent failure of Congress to regulate derivatives — those swaps and other nearly incomprehensible instruments implicated in the collapses of Enron, Lehman Bros., and AIG, and which still cast a shadow over the banking system. (They're also at the heart of the SEC's fraud case against Goldman, Sachs & Co.)

Some government officials, notably Brooksley Born of the Commodity Futures Trading Commission, warned as far back as the late 1990s that trading in unregulated derivatives had gotten out of control.

Born got slapped down by Alan Greenspan, Robert Rubin and Arthur Levitt, the chairmen of the Federal Reserve, the Treasury, and the SEC, respectively, who argued that too much regulation would stifle the promise of a very profitable financial product line.

Their position got cemented into the Commodity Futures Modernization Act of 2000, which was partially written by lobbyists for derivatives dealers. The CFMA was passed by an overwhelming vote in the House and unanimous consent in the Senate. So who voted for it? Among others: Nancy Pelosi and Barney Frank in the House, and Chuck Grassley in the Senate.

A genuinely bipartisan dereliction of duty, in other words.

"The CFMA made it clear that there'd be no regulation of derivatives," says Frank Partnoy, a financial law expert at the University of San Diego. The financial reform bill being considered by Congress this week continues the tradition: "People shouldn't be under any illusion that this does much to regulate derivatives," he told me.

All these events began or peaked during the SEC chairmanship of the indolent Christopher Cox. The former Newport Beach congressman was nominated by President George W. Bush in 2005 to replace William Donaldson, a Republican who had fostered a strong enforcement culture at the agency.

Cox was confirmed by the Senate that July by unanimous consent, which means his appointment was approved without a murmur of dissent by almost every Democrat in the chamber and by Grassley, among other tribunes of effective financial regulation.

Cox's predilection for protecting big business from government oversight was no secret to anyone who examined his voting record. He served at the SEC until 2009, leaving the once-proud enforcement staff of that agency a hollowed-out shell. So let's not blame the SEC's employees for what was manifestly a management failure.

Despite having this truly pornographic history to think about, we're transfixed by a few dozen hapless government bureaucrats and their stress-relieving techniques.

Is this any more than our usual sanctimony about sexual mores? Nary a decade can pass without another government study positing pornography as the destroyer of civilization, not to mention periodic public uproars over things like the flash of naked skin on a Super Bowl halftime.